Tuesday, May 02, 2006

Dow Chemical revised to BUY

I have always stated that I would rather have my ego bruised but wind up with the right stocks and our newest Wonk of the Day, C6H6 has put me in my place. After a lengthy back and forth about the calculations of Altman's Z-scores it turns out that I had missed a point about the different units of a set of weighting coefficients.

The overall result is that the Z-scores show DOW to be rather more healthy than I had previously posted, with a Z-score at a healthy 3. With this reassurance that DOW is healthy and previous analysis showing good discount rate and cash flow I am changing my call to a BUY and I will be buying some stock in this company shortly. For a feel of what a Z-score of 3 means here is a plot over time of what S&P rating different Z-scores have been equivalent to:

Plot of how rating agency ratings (data and fit lines) have followed Z-scores over time. Typically the agency ratings track this plot on a lag of about 3-years (that is to say that the Z-score is a predictor of the agency ratings). At this time Dow Chemical has a rating above 3, which is quite safe.

Thanks go out to all the readers who suggested paths to re-evaluate, even those that did not pan out. The entire goal of this site is to encourage critical review and arrive at the right answer.

Click back to the main page!


Anonymous Anonymous said...

Thanks FW for the acknowledgement. I want to commend you for your open dialogue and for living your objective "to encourage critical review and arrive at the right answer".

I learned a good deal in this exchange. I hope for more of the same in the future.


3:26 PM  
Blogger FinanceWonk said...

I do hope you'll stick around and help us get things right in the future as well. It's always painfull to find I've made an error but if we get a solid group of smart people arguing topics around here we are likely to come up with some good answers.

I look forward to seeing you as Wonk of the Day again some time. Contact me by email through my profile if you feel the desire to write a guest column some time :)



4:20 PM  

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